BoJ Expected to Hold Steady, Market Focus Shifts to Forward Guidance

The Bank of Japan (BoJ) is expected to maintain current policies at its upcoming meeting, with market focus shifting to forward guidance. The Japanese yen has strengthened recently due to the BoJ's hawkish shift and anticipated Fed rate cuts. Despite slower Q2 growth, Japan's economy remains above the BoJ's 2024 forecast. Inflation has exceeded the 2% target for 28 months, impacting consumer demand.

Export growth has slowed, particularly to the U.S. and Europe, clouding Japan's economic outlook. As the interest rate gap between Japan and the U.S. narrows, a stronger yen could affect exporters' performance, emphasizing the importance of domestic demand.

While real wages have stopped declining, consumer spending remains below pre-pandemic levels. Economists anticipate the next BoJ rate hike in December or January, with futures markets pricing a 32% chance of another hike this year. The yen could strengthen if signals for another hike are given after the meeting.

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